Today's Lunchtime News featured a look at the red flags raised by some companies as they guided earnings expectations Southward today. This weekend's edition of Fool's Gold will feature a Sector Snapshot on eater-tainment outfits like Rainforest Cafe, Planet Hollywood and Dave & Buster's, a Rogue feature on the shift from pension funds to individual retirement plans, and the Weekend Research Center. We'll also have a Special Section on Canandaigua Wine, which uncorked some bad news today.
Also of interest is FoolBall -- an exciting and Foolish game. Week Two's questions are up -- if you prove that you know more about Football than most other Fools, you can earn yourself anything from a Fossil watch to a CD from Tower Records to a crate of fruit from eGG to a trip to Phoenix courtesy of Southwest Airlines! So check FoolBall out and guess the total points scored in the Eagles-Packers game, whether Peete or Favre will pass more, which position will draw the first flag, and which Budweiser commercial will air first.
CANANDAIGUA WINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WINEA)") else Response.Write("(NASDAQ: WINEA)") end if %>
1-800-759-8643 (passcode 1234) (replay)
Discussion of earnings estimates for Q2 and FY 1997
Help-desk software developer REMEDY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RMDY)") else Response.Write("(NASDAQ: RMDY)") end if %> surged $9 1/2 to $58 on company bullishness and on brokerage upgrades. Alex. Brown and Hambrecht & Quist both upped Remedy from "buy" to "strong buy," while H&Q raised its 1997 estimates from $1.10 per share to $1.44. What exactly did Remedy say to cause such excitement? It predicted 1997 revenues growing at 60%, up from previous expectations of 50-54%. Ed Bierdeman, an analyst at Dakin Securities, noted that this ''reaffirms Remedy's position as an industry leader in the help-desk market... It also speaks well for the company's strategy of getting its foot in a corporation's door by selling to single departments and then expanding sales through the rest of the company."
Shares of C-PHONE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CFON)") else Response.Write("(NASDAQ: CFON)") end if %> surged $1 1/16 to $6 1/16 today, after the company-formerly-known-as-Prince -- er, as Target Technologies -- reported yesterday that it had received record orders, valued at $865,000, for its second quarter. Shedding some light on the significance of this is the fact that in the last quarter, a mere three months earlier, the company booked $400,240. The company, which makes desktop videoconferencing systems, has steadily dropped from heights of around $8 per share over the last six months, but is rebounding strongly on these impressive sales numbers.
Shares of ophthalmic laser system developer SUMMIT TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BEAM)") else Response.Write("(NASDAQ: BEAM)") end if %> beamed up $5/16 to $6 1/8 after the company, enmeshed in legal squabbles with competitor VISX INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VISX)") else Response.Write("(NASDAQ: VISX)") end if %>, sent its founder and Chief Executive Officer (CEO), David F. Muller, packing. Summit named President D. Verne Sharma to chair an executive committee. Richard F. Miller, a member of the Board of Directors, speaking on behalf of the Board, stated, "It is now time for the company to focus on the bottom line. We believe that Mr. Sharma and his team have the ability to accomplish our goals." With investors perhaps excited by this evidence of further turmoil at Summit, VISX shares jumped $1 15/16 to $20 7/16.
QUICK TAKES: DIANA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DNA)") else Response.Write("(NYSE: DNA)") end if %> advanced $8 to $41 3/4 on news that a fund manager bought 20,000 shares for his personal account at $20.50 per share, while his Funds bought $323,000 shares at an average price of $31.73. Asensio & Co. reiterated its "strong sell" recommendation for Diana... Shares of INPHYNET MEDICAL MANAGEMENT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IMMI)") else Response.Write("(NASDAQ: IMMI)") end if %> jumped $2 1/4 to $17 1/4 after the company agreed to manage healthcare for over 50,000 Floridian members of PHYSICIAN CORP. OF AMERICA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PCAM)") else Response.Write("(NASDAQ: PCAM)") end if %>.
VERITY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VRTY)") else Response.Write("(NASDAQ: VRTY)") end if %>, the Internet search and publishing software concern, saw its shares decimated by a $12 to $12 1/8 drop after the firm warned that it expects to lose $0.12 per share in its first quarter, and not earn the $0.05 expected. Verity cited increased operating expenses and staffing expenses. Alex. Brown downgraded the firm from "buy" to "neutral." CANANDAIGUA WINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WINEA)") else Response.Write("(NASDAQ: WINEA)") end if %> also uncorked some bad news today, revising its earnings estimates downward by nearly half due to its higher-than-expected cost of product sold, lower-than-expected efficiency of production, and lower-than-expected sales. Shares soured $5 to $17. You can listen to the company's own discussion of its earnings -- we list the access number in a section above.
WORKGROUP TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WKGP)") else Response.Write("(NASDAQ: WKGP)") end if %> was also slashed in half, off $8 5/8 to $6 3/8 after the data management software concern warned of impending disappointing earnings. The company, which was expected to earn $0.06 per share in its second quarter, now expects to earn substantially less than that -- perhaps reporting a loss. Blamed were lower-than-expected revenues from European operations, delays delivering an NT version of its server product, and delays closing several important orders. Alex. Brown & Sons downgraded the company from "buy" to "neutral." Workgroup announced plans to form a new development division, which will focus on integrating its CMS product with computer-aided design (CAD), word-processing, and office administration applications.
Many other companies issued earnings warnings today, and suffered for it, too. KENTEK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: KNTK)") else Response.Write("(NASDAQ: KNTK)") end if %>, the beleaguered printer company, warned that its first quarter will fall 15-20% below expectations and saw its shares plunge $5/8 to $5 3/4. CYBEROPTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CYBE)") else Response.Write("(NASDAQ: CYBE)") end if %> dropped $5/8 to $11 3/4 after warning that it expects to post a small loss for its third quarter, due to overcapacity and inventory problems in the semiconductor industry. TRIMBLE NAVIGATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TRMB)") else Response.Write("(NASDAQ: TRMB)") end if %>, specializing in satellite geo-positioning equipment, fell $2 1/2 to $15 3/4 after warning of an upcoming loss and announcing plans to lay off 10% of its workforce. METATEC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: META)") else Response.Write("(NASDAQ: META)") end if %> warned that its optical disks won't be bringing in as much revenue and earnings as expected. Shares were off $1 3/4 to $7 1/2. COMPUCOM SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CMPC)") else Response.Write("(NASDAQ: CMPC)") end if %> also joined the party, warning that "investments might reduce earnings growth for six to nine months" and falling $2 1/8 to $8 5/8.
QUICK CUTS: Shares of ERD WASTE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ERDI)") else Response.Write("(NASDAQ: ERDI)") end if %> were wasted to the tune of a 39% drop, falling $2 3/8 to $5 after the New York State Department of Environmental Conservation moved to close its Long Beach, N.Y. resource recovery facility... Meanwhile, BOISE CASCADE OFFICE PRODUCTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BOP)") else Response.Write("(NYSE: BOP)") end if %> fell $5 1/4 to $17 1/2 after Dean Witter Reynolds cut its estimates substantially, on lower-than-expected sales. J.P. Morgan also lowered its estimates.
An Investment Opinion
by Randy Befumo (MF Templar)
FOOL ON THE HILL
The Distribution Blues
The inventory correction that has consumed the semiconductor and electronics components manufacturers has begun to cause collateral damage at the electronics distributors who resell their wares. Unlike the semiconductor equipment manufacturers that have been swallowed whole over the last ten months as the semiconductor manufacturers trimmed capital expansion budgets, the distributors are getting smacked around by the same group that is crushing the semiconductor manufacturers -- their customers. Today's profit warning by WYLE ELETRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WYL)") else Response.Write("(NYSE: WYL)") end if %> follows a similar announcement by RICHEY ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RCHY)") else Response.Write("(NASDAQ: RCHY)") end if %> on Wednesday, creating grim implications for the group.
The electronics component distributors resell the components that the electronics components manufacturers make and do not sell themselves. When a component is sold by the manufacturer, it is said to be sold through the "direct channel", meaning the customer deals directly with the company that made the product. When a distributor gets involved, the sale happens through the "indirect channel", meaning the distributor is simply reselling something to the customer that it purchased from the manufacturer.
Distributors distinguish themselves by having a wide array of products from many manufacturers and offering "value-added" services, like technical support for product installation. Using a distributor instead of dealing directly with the company makes sense for businesses that do not want not deal with a whole bunch of suppliers in order to save money or prevent headaches.
Over the last ten months, semiconductor manufacturers have seen slowing orders from their customers because they had too much product in inventory. When supply was tight, meaning that components were hard to get, customers built up large inventories in order to prevent any shortages. When supply improved, these customers decided that instead of buying new product they would simply run their inventories down to lower levels. This is what is called an "inventory correction" -- orders to manufacturers slow because customers are working off their inventories, not because demand has actually slowed. A lot of pundits have been calling the current ten-month-old downturn in the electronics component industry an inventory correction, implying that once inventories are normal everything will get better.
Understanding that the semiconductor manufacturers are the direct channel, slowdown in orders from the indirect channel would have been a major part of the revenue decline. However, when customers are ordering less this eventually impacts the indirect channel as well as hitting the direct channel. The fact that these guys have been starting to flag is not a surprise considering they sell to the same people. If a few are pre-announcing bad earnings in the upcoming quarter, it is also logical to assume that some of the guys that have not announced might be having difficulties as well. Examining the specific problems at the three companies who have pre-announced will give us a better sense of whether this is the case or not.
Wednesday, Richey Electronics slipped $2 1/8 to $7 7/8 after warning that it expects to disappoint analysts with its third quarter earnings. A rash of order rescheduling by customers of interconnecting, electromechanical and passive electronic components distributors has caused their "visibility" to decrease substantially. Richey was up $1/2 to $8 1/4 today on heavy volume but remains well below its 52-week high of $16. The company told analysts that a decline in long-term orders and a pick-up in orders for delivery in the next 30 days, called "turns business" in the industry, has caused their revenue stream to become much less predictable. This is where the "visibility" concept comes in -- if you have a lot of orders that are long-term, you know what your revenues are going to be. If you have a lot of orders that are for immediate delivery and are coming in fits and starts, it is harder to accurately predict what your revenues and earnings will be going forward. Richey described a shift to turns business that has happened over the last six weeks.
Today, Wyle Electronics announced it expected lower third quarter earnings than it had previously suggested, dropping this stock down $3 1/4 to $30 1/8. Wyle distributes semiconductors and computer products. Wyle also described shorter lead times and inventory reduction among its customers, meaning more of their business has become turns business as well. They anticipate a sequential revenue decline of 5% to 10% from the second quarter with lower gross margins, meaning that earnings will be down versus the second quarter by an even greater percentage. For the third quarter, Wyle reported earnings of $0.80 EPS on sales of $273 million.
This continued decline in orders implies to me that there is a lot more going on than just an inventory correction, although a lot of analysts who want to call the bottom in the semiconductor market have been putting out buys over the past few weeks. A decline in demand concomitant with an inventory correction looks to be more the case here, meaning that the big inventories the customers built up are lasting a lot longer than expected. Other companies that could be affected in the electronics distribution business are AVNET <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AVT)") else Response.Write("(NYSE: AVT)") end if %>, MARSHALL INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MI)") else Response.Write("(NYSE: MI)") end if %>, REXEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RXL)") else Response.Write("(NYSE: RXL)") end if %>, ARROW ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ARW)") else Response.Write("(NYSE: ARW)") end if %>, NU-HORIZONS ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NUHC)") else Response.Write("(NASDAQ: NUHC)") end if %> and PIONEER STANDARD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PIOS)") else Response.Write("(NASDAQ: PIOS)") end if %>. The contract manufacturers like KENT ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KNT)") else Response.Write("(NYSE: KNT)") end if %>, down $4 1/4 to $17 1/8 on a profit warning and two downgrades, also will have problems as they essentially put components together for the manufacturers and have their businesses pretty tied to the overall inventory and demand picture. (You can learn more about the contract manufacturers in an article I wrote on June 11th in this column, click >HERE<.)